Policy Proprioception

"Proprioception" is a word that Macro Man has only ever heard inside of a gym, usually in the context of balancing on some sort of ball or hemisphere. It refers to the body's sense of itself, and how different areas of the body relate to each other. You can get a sense of your own proprioception by balancing on something with your eyes closed, which is surprisingly difficult in relationship with doing so with eyes wide open.

The economic policy proprioception in Europe appears to need a bit of training. Saturdays and Sundays are now workdays, unfortunately, and Macro Man's Blackberry rattled and hummed all weekend with new headlines out of Europe.

* The Hypo Real estate bailout falls through....and then is reincarnated in a larger (but apparently still insufficient) size.

* Germany complains about the Irish deposit guarantee...and then offers a similar guarantee for German banks

* Fortis is dismembered, while the market watches Dexia with bated breath

* A Europe-wide rescue package is proposed, rejected, and then apparently revived last night

The US authorities may be spending like a drunken sailor, but on current evidence the Europeans would struggle to organize a piss-up in a brewery. And although European equities have come under the cosh today, they are still well off their recent lows, unlike stocks in the US, Japan, and a number of emerging markets. At the time of writing, the IBEX is down less than a percent this month, while the Eurostoxx is only down a third of the amount implied by S&P 500 futures. Colour Macro Man bemused on this one...

The market's vote of no confidence in Europe has been more acutely observed in the currency market, where recent EUR/USD resembles nothing so much as a band of lemmings jumping off a cliff. Was it really only two weeks ago that EUR/USD had its biggest daily gain in the nearly ten-year history of the single currency?
So global equities are a sea of red, but as of yet today's weakness is relatively controlled; there's no sense of panic. Macro Man cannot help but think that risks of a global, coordinated rate cut have risen substantially, particularly after the ECB left the door open for an intra-meeting cut last week. It is perhaps this possibility that has kept today's European sell-off relatively orderly. As suggested last week, the front end of Europe has firmed, with the Schatz future trading up nearly half a point from Friday's settlement price.

Macro Man is trying to structure a portfolio wherein he participates in equity weakness but has some protection in the event of a coordinated policy easing- which would presumably lead to at least a short term bounce in equity indices. Such a bounce may be short-lived (as the recent price action around the TARP would suggest), but still might be painful. Macro Man was interested to see that the SEC has decided to end its short selling ban on financials this this week.

Perhaps he is too cyniccal, but are they now trying to let the market get short so that a subsequent squeeze will drive prices higher than if there were no shorts out there? Hmmmmm....

Macro Man is trying to maintain a sense of portfolio proprioception, but in an ever-changing world of correlation breakdowns, volatility spikes, and regulatory regime shifts, it's all too easy to lose his sense of balance with an embarrassing thud.